Your Year-End Tax Checklist, Plus a Few Extras for 2020

tax planning, financial planning

A lot of us have been in the attic lately, putting away the ghosts and skeletons from Halloween and dusting off the holiday decorations. While you’re up there, can you find your year-end tax checklist?

2020 has been a year unlike any other. For many, the summer vacation was either canceled or truncated. Our eating-out bill went down while our staying-in bill (streaming subscriptions, house repairs, toilet paper and food delivery) has gone up. The new accessory expense, the mask, has a whole cottage industry built around it.

Add these incidentals to the seismic economic shifts in Washington, and thanks to new legislation, we find our end-of-the-year checklist may need not just a dusting off, but a serious revision.

Let’s look at your year-end tax planning checklist for 2020 and see what we can keep and what we might need to add.

Old Checkboxes

Even though tax time doesn’t come to a crunch until next winter, your deadlines for 2020 activity will end – you guessed it – when 2020 does. So don’t overlook some classic tax strategies that haven’t changed, outlined below.

Roth Conversion Cutoff

The Roth conversion is a standard financial maneuver that can help you save big in taxes over the long run. Put simply, your IRA contributions would be post-tax rather than pre-tax under a Roth, and thus you have control over how much tax is paid now versus the future.

The conversion process from a traditional IRA to a Roth is fairly simple, but can only be done once a year, hence its presence on your checklist. Make sure you have the capital free to do a conversion, and then get yourself into tax-free territory.

Itemizing Versus Minimum Standard Deduction

One of the most universally significant changes to taxes after the Tax Cuts and Jobs Act is the change in minimum standard deduction. The ceilings on these went up dramatically, now sitting at $12,400 for single taxpayers ($24,800 for married, filing jointly).

These changes have converted many former itemizers into standard deduction recipients, which means a change in your tax planning strategy. Charitable giving, medical expenses, home mortgage interest and other items will have to be accounted for if you itemize, or conversely, your tax planning will be simplified.

Charitable Gifts

Charitable giving is another standard tax efficiency move, especially helpful if it involves giving you’re already doing. Tithing regularly to a local congregation? Giving monthly gifts to your favorite non-profit? All of this can help to reduce your tax footprint.

But this conversation dovetails with the changes in the minimum standard deduction mentioned above. Whether you itemized or take the standard deduction will change the way you give, and the way you plan your taxes.

Bunching Contributions

Bunching or bundling contributions can be a way to bring up your itemized deductions. Doubling or tripling your contributions one year may put you in a better place taxwise rather than stretching the contributions over that time. Again, this is something to have in place before the year’s end.

Check your Maximums

Have you maxed out your annual accounts? Just a few for 2020:

  • 401(k) – $19,500 ($26,000 if you’re age 50 or older)
  • Health Savings Account (HSA) – $7,100 families ($1,000 catch-up contribution if you’re age 55 or older)
  • IRA (Roth or Traditional) – $6,000 ($7,000 if you’re age 50 or older)

Make sure you’re reaching your goals on these accounts and others, especially if you have an employer match on your 401(k). Be mindful of the tax implications of these accounts, and take full advantage of those treatments by beating the deadlines. Again, tax crunch time is a few months away, but now is the time to get these important funds in place.

New Tax Planning Checkboxes

Here are a few new checkboxes you may want to pencil in on your year-end tax checklist for 2020. The biggest change this year between Washington and Wall Street has been the CARES Act, which made some temporary, but significant changes to the financial planning landscape. Let’s look at a few that could affect your year-end tax planning checklist for 2020.

Required Minimum Distributions (RMDs)

RMDs are part of life if you’re over 72 and you have a traditional 401(k) or non-Roth IRA. You didn’t pay taxes on the money going into the accounts, and the RMDs are the way to get those taxes when the money is withdrawn.

As per the CARES Act, RMDs are suspended for 2020 to allow you to spend or save according to your needs. The SECURE Act also recently changed the landscape with RMDs, raising the required age to 72 and eliminating the “stretch IRA” option for inherited accounts.

Check out our SECURE Act RMD Calculator

Employer Benefits

There are two specific employer benefits provided by the CARES Act that can benefit you as a business owner or employee in 2020. If, like any wise employer, you know it’s more than simply salary that keeps your good workers in-house, these benefits can work for you.

Disaster relief payments

COVID-19 is what the IRS calls a “qualified disaster” – meaning a company could provide employees with “qualified disaster relief” grants which have a favorable tax treatment for both parties.

If a company decided to provide its staff with a $1,000 bonus as they navigate life affected by the virus, they could designate these as “qualified disaster relief.” Under this program, there are no payroll taxes for employees or employers, and they aren’t considered a “taxable gift” as they would be in the past.

Educational assistance payments

Employees can already exclude from regular gross income assistance from employers for education up to $5,250 a year. For example, an employee gets an MBA essentially “paid for” by an employer under this program, and the assistance they receive is not considered part of their taxable income.

The CARES Act has expanded the definition of “educational assistance” to include payments on qualified educational loans. So not only can an employer offer educational assistance to entice good help, they can offer help with loans the student already has. Under the program, up to $5,250 in bonuses can be tax-free for employers and employees.

New Coronavirus-related Distribution Exception

The CARES Act also allows for an exception this year for families directly affected by COVID-19. If you or a family were diagnosed, or if you experienced direct financial consequences from the virus (layoff, furlough, etc.), then you may qualify.

Under this exception, you can take up to $100,000 from your IRA to help with expenses. You won’t incur the 10% penalty for distributions taken before age 59.5. This distribution will automatically be spread over the next three years from a tax perspective, allowing you to use funds for immediate needs while mitigating the tax hit.

Time is Even More of the Essence

If it’s possible, time is even more of the essence for year-end tax wrap up in 2020. Yearly deadlines are coming up and temporary deadlines from legislation this year are upon us as well. Whatever Washington is bringing our way, we can take advantage of tax-planning strategies now.

Even in this extraordinary year, the rush of the holidays will leave us distracted and the calendar will change before we know it. Get in touch with your financial advisor for one last 2020 check-in to make sure you’re taking advantage of every opportunity.

New Tax Software

In light of these changes and this turbulent year, your advisor team acquired a new tax-planning software to help us plan more accurately and efficiently. We can scan in your recent tax return and put together a tailored plan for your needs with tax-saving suggestions. Your end-of-the-year check-in would be a perfect time to go through this process.

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